Defining supplier relationship management system requirements for an EPC firm: a case study

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HUSNAIN SIKANDER

DEFINING SUPPLIER RELATIONSHIP MANAGEMENT SYSTEM REQUIREMENTS FOR AN EPC FIRM: A CASE STUDY

Master of Science Thesis

Examiner: Professor Samuli Pekkola Assistant Professor Henri Pirkkalainen Examiner and topic approved on

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ABSTRACT

HUSNAIN SIKANDER: Defining supplier relationship management system requirements for an EPC firm: a case study.

Tampere University of Technology

Master of Science Thesis, 89 pages, 1 Appendix page

Master’s Degree Program in Industrial Engineering and Management Major: International sales and sourcing

Examiner: Professor Samuli Pekkola and Assistant Professor Henri Pirkkalainen

Keywords: supplier relationship management systems, requirements elicitation, EPC projects

Improved information technology has reduced the barriers to access international markets, businesses nowadays buy or sell from or to anywhere in the world. Globalization has also encouraged companies to do business far away from their domestic markets.

Efficient logistics has enabled companies to manufacture their products in one country and sell it anywhere around the world. Additionally, outsourcing trends have made companies transfer non-core activities to other parts of the supply chains.

All these factors have made the supply networks complex and spread all over the world, at the same time businesses have become more dependent on their suppliers. In order to efficiently manage these supply networks, companies have focused on the developing relationships with their suppliers. Supplier relationship management (SRM) has been re- searched and abundant authors have written about this subject. Many software companies have developed SRM system to assist companies in managing supplier relationships.

Engineering Procurement Construction (EPC) firms work with a large number of goods and services suppliers for any investment projects. The nature of this industry significantly differs from that of manufacturing industry; however, most of academic literature on SRM is focused on manufacturing industry. Most of the systems for supplier relationship management are built with manufacturing industry being the primary focus as well.

The objective of this thesis is to define the requirements for SRM system for an EPC firm delivering processing facility investment projects.

To define these requirements, 19 people from the case company, working in indifferent departments, were interviewed to gather the information regarding their needs. Elicited requirements were focused on supplier information management, requisitioning and operative purchasing, product catalogue management, and supplier performance management. Additionally, supplier relationship management activities that are of most interest to an EPC firm were identified as; supplier performance management, supplier selection process, and supplier evaluation.

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PREFACE

I would like to express my sincere gratitude to Dr. Henri Pirkkalainen for the immense support and valuable guidance during this work. I would also like to thank Dr. Samuli Pekkola for the supervision fro thesis. Moreover, I would like to thank Mr. Eero Rauvola at the case company for getting me the opportunity to do my thesis for the company.

Tampere, December 2017

Husnain Sikander

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LIST OF FIGURES

Figure 1 Research framework the thesis (adapted from Saunders et al. 2009). ... 9

Figure 2 Research process. ... 11

Figure 3 Data gathering methods ... 12

Figure 4 Spiral Model of Software Development (Boehm, 1995) ... 14

Figure 7 Structure of the thesis. ... 15

Figure 8 EPC Project Phases for a Processes Industry Facility (Aronen, 2015). ... 17

Figure 9 EPC Contract Arrangement (Plummer, 2007) ... 20

Figure 10 EPC contract arrangement (Plummer, 2007) ... 20

Figure 11 EPCM Contracting Strategy (Plummer, 2007) ... 21

Figure 12 EPCM contract arrangements (Plummer, 2007). ... 22

Figure 13 Operational activities in the construction industry (Edum‐Fotwe, Thorpe and McCaffer, 1999). ... 23

Figure 14 Construction industry supply chain (Cox and Ireland, 2001). ... 23

Figure 15 Classification of supplier relationship Trent (2005) and Zamboni (2011) ... 28

Figure 16 Supplier classification Cox (2004) ... 29

Figure 17 Peter Kraljic’s (1983) portfolio matrix. ... 30

Figure 18 Leenders et al., (2006) buyer-supplier satisfaction model ... 39

Figure 19 Different components of Software Requirements Specification adopted (Goldsmith, 2004) ... 41

Figure 20 Structure of requirements engineering (adoped Wiegers, 2003). ... 45

Figure 21 Requirement elicitation components (Kotonya and Sommerville, 2002) ... 46

Figure 22 Interaction of requirements elicitation and analysis... 48

Figure 23 Requirements engineering spiral model (Kotonya and Sommerville, 2002) ... 49

Figure 24 Conceptual framework. ... 50

Figure 25 Projects Operating Purchasing by Client ... 51

Figure 26 Procurement on client’s behalf. ... 52

Figure 27 Registration and Qualifications of Suppliers. ... 55

Figure 28 Types of Suppliers ... 58

Figure 29 Supplier performance management activities. ... 60

Figure 30 Operation Procurement Process ... 62

Figure 31 Use Case: Product Catalogue ... 65

Figure 32 Use Case: Requisition and Purchasing ... 67

Figure 33 Use Case: Performance Management... 68

Figure 34 Use Case: Supplier Information Management ... 69

Figure 35 Classification of goods suppliers relationships for EPC firm (adopted Kraljic, 1983) ... 80

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1. INTRODUCTION

1.1 Motivation

Globalization and modern information technology tools have reduced the barriers to ac- cessing global markets, these days businesses are able to buy and sell virtually from or to anywhere in the world. This ease of access to international suppliers has led to businesses acquiring goods and services more than they have ever before, particularly in the developed economies (Liker & Choi, 2004). Supply chain practices have enabled businesses to manufacturer products in one place and sell these in any part of the world. For customers, this creates the need to gain more knowledge about the supply network (Trent, 2005).

Services, particularly knowledge intensive services, such as; expert consultancies, software services, designing among others, can be sourced from external suppliers located anywhere in the world.

Companies are becoming increasingly dependent on the suppliers to reduce costs, better quality products, and the development of new products or services (Liker & Choi, 2004).

In order to manage this complexity and diversity in the supplier base companies have focused on supplier relationship management (Park et al., 2010). Supplier Relationship Management is the process of developing and maintaining the relationship with suppliers in a structured manner (Lambert & Schwieterman, 2012). There is abundant literature available that discusses various activities in the supplier relationship management process such as; supplier selection, supplier development, risk management, and performance management (Liker and Choi, 2004; Svensson, 2004; Neely, Gregory and Platts, 2005;

Leenders et al., 2006; Mentzer Jr, Myers and Stank, 2007; Fogg, 2009; Park et al., 2010;

Sundtoft Hald and Ellegaard, 2011). To support these activities, a large number of software solutions are commercially available by various software companies as well.

However, most of the discussion in the academic literature is focused on the manufacturing industry. There is lack of information available from the perspective of a professional services provider; how the emphasis on different activities of the supplier relationship management process could be affected for the businesses who do not, as such, manufacture a product, such as Engineering-Procurement and Construction (EPC) contractor.

Similarly, most of the software solutions are geared towards the needs of manufacturing businesses. Therefore, the aim of this thesis is to identify requirements for the supplier relationship management system for an EPC firm.

1.2 Research Objective and the Case Company

The target organization of this study is a Finnish engineering company focusing on process industry investment projects. The company delivers engineering procurement and

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construction management (EPCM) projects for clients in Oil & Gas, petrochemical, chemicals, and biodiesel refineries. Company has three offices in Finland, and overseas offices in Sweden, Netherlands, Singapore, UAE, India, and Azerbaijan. Case company carries out investment projects of various sizes, from small upgrades to turnaround projects for the large-scale process facilities. Moreover, in future, company intends to deliver EPC or turnkey projects as well. Currently, company does not have a supplier relationship management system and primarily uses the suppliers recommended and approved by the clients.

As company moves towards more EPC projects, there is a realization in the management that it would need to develop and maintain its own base of goods and services suppliers.

Moreover, company’s long-term strategy includes the digitalization of its processes as much as possible. In the current stage of this multiple phase strategy, the company is acquiring a material management system to insure material visibility from identification of the need to the final consumption of a product. This whole process is closely related to interaction with suppliers, and in proceeding stages of the project company intends to acquire a supplier relationship management system as well. Therefore, the goal of this thesis is to…

…define supplier relationship management system requirements for an engineer- ing procurement construction (EPC) contractor..

In order to approach the research goal from an EPC contractor’s perspective, this thesis tries to probe the following sub questions:

 What are the current SRM practices?

 What activities of the SRM process are the most relevant to an EPC contractor?

 What are the processes related to supplier interaction where a digital system could bring improvement?

The first question will help understand the current state of SRM practices in the company through reviewing existing company processes. Second, what are the key activities of supplier relationship management that an EPC contractor should focus on the most?

Lastly, third question will help identify the parts of the process where implementing a digital system could bring improvements. In this thesis, a qualitative approach is utilized by conducting semi structured interviews with internal employees of the case company.

Based on this, the key themes are identified that are raised in the interviews. After identifying and analyzing the most common responses, the requirements for SRM system for EPC contractor are defined.

1.3 Research Methodology

This part describes the research method adopted for this thesis.

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1.3.1 Research Framework

The research framework for this thesis is based on the model presented by Saunders et al.’s (2009). It explains the chosen research philosophy, the research approach, research strategy, time-horizon, data collection methods. It is shown in Figure 1.

Research philosophy Interpretivism

Research approach Deductive

Research

strategy Data collection

methods Interviews, Literature review Time

horizon Cross- sectional Case Study

Figure 1 Research framework the thesis (adapted from Saunders et al. 2009).

There are four dominant philosophies on conducting empirical research, positivism, constructivism, and pragmatism (Creswell, 2003). The methods selected, for getting an acceptable evidence in response to a research question, are greatly affected by the adopted philosophical stance. Constructivism, also called interpretivism (Klein and Myers, 1999), states that the scientific knowledge cannot be separated from its human context. Con- structivists are more concerned with understanding how different people make sense of the world and attach meaning to a phenomenon, than with verifying a theory. It is possible that theories may emerge in the process, but they always depend on the context under study. This stance advocates collecting rich data about human activities or processes in an environment (Easterbrook et al., 2008). As, the purpose of this research is to define the system requirement, this necessitates understanding the human and process need in a particular social context and therefore interpretivism stance to research is adopted.

Deductive and inductive reasoning are the two recognized approaches to analysis; inductive analysis is aimed at making broader generalizations based on specific observations.

Deductive reasoning, on the other hand, is a top-down approach that starts out with a general theory or statement and narrows down to more specific matter. Since, the aim is to specify the requirements based on the collected data and understand the human and process need, hence inductive reasoning is the chosen approach here.

Yin (2003)states that case study is “an empirical inquiry that investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident”. Case studies are an effective tool to thor- oughly understand a phenomenon and the reasons behind its occurrence. Easterbrook et

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al., (2008) has explained two types of case studies in software engineering research: ex- ploratory and confirmatory case studies. Exploratory case studies are used to investigate a phenomenon to build new theories whereas confirmatory case studies are used to prove or refute existing theories. This study is an exploratory case study, with the aim to understand needs of the users and define the requirements that a system should meet.

The time horizon in Saunders et al.’s (2009) framework refers to the duration of the research study, they have presented two type of time horizons; cross-sectional or longitudinal. Longitudinal horizons refer to longer period research and in cross-sectional time horizons studies, subjects are studied only for a restricted period. Since the research was conducted in a limited time, which by definition is the cross-sectional time horizon. The data collection techniques used for this research were qualitative interviews, literature review, and case company’s documentation. Some Interviews are usually considered a part of other methodologies such as case studies; however, others regard interviews as a separate category (Damian and Chisan, 2006). Interviews are considered an effective tool for collecting valid, reliable and relevant data Saunders et al.’s (2009).

Qualitative interviews are a conversation between the researcher and respondent, these interviews could be structured or unstructured. In structured interviews, there is a set agenda and the researcher asks questions from the respondent, on the other hand, in unstructured interviews there is no fixed agenda and there is a free style conversation. How- ever, in practice even unstructured interviews have some agenda to keep the conversation form digressing (Eriksson and Kovalainen, 2008) therefore, most of the interviews for research purposes are semi-structured.

1.3.2 Research Process

This research was conducted as case study in order to explore the system needs for personnel in a certain context. The processes started with the task of defining the system requirements for an SRM system at the case company. Currently, company delivers process industry projects with EPCM contracts and intends to move towards delivering EPC contracts. In order to better understand the EPC projects, information related to EPC project lifecycle was collected. Next, the differences between these two contracting strategies were studied to understand how the role and responsibility of the company would be affected when moving from EPCM projects to EPC projects. Since the supply chain of construction industry differs from the manufacturing industry supply chain, these differentiating factors were reviewed from academic literature.

The concept of supplier relationship management is not a new one; however, there still some ambiguities around it. To clarify the definition of SRM and the reasons for adopting SRM was studied from the academic literature on this subject. There are various models described by different authors to classify the relationships with suppliers, some of these models were reviewed to get an understanding how and why these differences occur.

Since, the company did not already have am SRM processes therefore information about

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different SRM activities were collected with the purpose to identify which activities could be relevant to the case company.

Reviewing concepts related to software requirements was felt important to fully understand what are software requirements and their types. In order to define requirements that would be acceptable, the characteristics of requirements were studied. This information helped in developing requirements that were complete, accurate, and clear. In the final part of the literature review, the process of requirements development was studied and to get the understanding how the requirements should be elicited, analyzed, and documented. This concluded the theoretical part of the research processes. The complete research process is shown in Figure 2

SRM

 Definition and Benefits: What is SRM and what are its benefits? 3.1 & 3.2

 Classification of Relationships: How and why do supplier relationships differ? 3.3

 SRM Process: What are the activities involved in SRM? 3.4

EPC Industry

 EPC Project Stages: What is the lifecycle of an EPC project? 2.1

 EPC v EPCM Contracts: What are the differences between these strategies? 2.2

 Construction Supply Chain: How it is different from manufacturing supply chain? 2.3 & 2.4

Requirements Engineering  Software Requirements: What are software requirements? 4.1

 Types and characteristics: What are different types and what should it include? 4.2, 4.3 & 4.4

 Requirements development: How are requirements elicited and analyzed? 4.5

LITERATURE REVIEW

Data Collection

 Data collection methods

 Participant selection process and Interviews

 Spiral Model of Software Development

Data Analysis

 Defining Business Requirements Ch. 6

 Developing use cases Ch. 7

EMPIRICAL STUDY

Figure 2 Research process.

Data Collection

During empirical study, semi structured qualitative interviews was used as the primary data collection method. Additionally, in order to understand the current situation current

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company processes & practices were studied. The information related to key activities in the SRM process was collected from the academic literature and used to develop the interview framework, shown in Appendix A. Firstly, key activities related in SRM process in the context of an EPC contractor were identified through literature review, qualitative interviews, and through existing practices. Second, through interviews and company’s literature, the current state of SRM was identified. Also through interviews, the need for the system was identified. Figure 3 shows the date gathering method for each purpose.

Figure 3 Data gathering methods

Participant Selection Process and Interviews

During an EPC project for building a process industry, various disciplines in the EPC contractor’s organization need to interact with suppliers. For example, during the delivery a large pump or a compressor, procurement is involved in operative purchasing and expediting, different engineering disciplines interact with the suppliers for various design related matters, project management and construction management organization work with the supplier during the installation and commissioning phase. Therefore, all these functions are important stakeholder for implementing an SRM system. To collect the data from various stakeholders’ perspective, people from all these functions were interviewed.

To select the participants from each function, corresponding department head were requested to nominate the most suitable participants for research.

A total of 19 internal employees from different departments were interviewed. From En- gineering, one Lead Design Engineer for each of the Electrical, Instrumentation & Con-

Prioritizing the requirements (maximum value for minimum resources) Drawing Requirement for the SRM System

To Be State(how supplier interaction should what should be managed & which activities should the SRM system support)

Qualitative interviews

As is State: Current ways for supplier interaction & challenges.

1. Qualitaive interviews 2. Company processes and

practices 3. Using existing academic literature

Identifying the SRM key activities in EPC/EPCM context 1. Using existing academic

literature 2. Qualitative interviews 3. Company processes and practices

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trol, and Mechanical Rotating Equipment were interviewed. From Procurement, five project procurement managers, two purchasers and two senior expeditors were interviewed.

From Construction Management, one construction manager and one construction con- sultant were the participants. From Project Management & control department, two project control managers, one project planning manager, and one engineering manager were included in the research. Additionally, the manger for Business System Support was also interviewed to get information regarding the requirements definition practices at eh company. Table 1 below shows the breakdown of interview participants according to the department.

Table 1 Breakdown of interview participants.

Department Interviews

Engineering 3

Procurement 9

Construction Management 2

Project Management & Control 3

Business Support 1

Fifteen people were interviewed individually and four people were interviewed together with two people in each interview session, interviews duration was 45 minutes to 60 minutes. Fourteen people were interviewed face to face and five interviews were conducted using an online meeting platform. Seventeen interviews were recorded with the permission of the participant while two participants did not consent to record the conversation.

Spiral Model of Software Development

Comprehensive system requirements for the case company can be defined when view- points of different functions and from different geographic location are taken into consideration. Therefore, a lean approach to requirements elicitation is employed. The Spiral Model of Software Development (Boehm, 1995) is followed as shown in Figure 4. Re- quirements are gathered, analyzed, documented and validated, in cyclical manner. One of the major strength of this model is the active user participation to determine the final requirements. This also helps eliminate the redundancy in the data.

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Figure 4 Spiral Model of Software Development (Boehm, 1995)

Qualitative interviews were divided into four phases, after each phase the collected data was analyzed and requirements were extracted. These preliminary requirements ware then used in successive phases, which were more targeted and the focus was shifted to discovering new needs and requirements. The successive interviews also served the purpose of validating and evaluating the already gathered requirements, which represented what the new system would be like. The process was repeated until a refined set of feasi- ble requirements were defined.

Data Analysis

Scientific literature, journal articles, and text books were used as the source of material during literature review. The data analysis in the literature review was used for categori- zation and summarization to combine and construct important topics in case company’s context. Documentation review regarding processes and work instruction was done to develop an understanding of the current state of the processes.

Qualitative interviews, all except one of which were recorded, were then transcribed. The transcripts of the interviews were then studied and analyzed to identify the emerging pat- terns. Responses related to similar issues were highlighted with different colors and then these responses were used to drive the requirements, or identify the opportunities where digitalizing would bring improvements. After each phase of the interviews, data was analyzed and preliminary results were developed.

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These results were then used in the proceeding interviews for validation of the defined requirements by the users themselves. This helped ensure that every derived requirement does indeed represents a user need. After the first phase of interviews, subsequent interviews were also used to assess the perceived benefit of having certain features in the system, this information assisted in prioritizing the requirements.

Finally, once all the interviews were complete the final requirements seemed to be falling into specific groups, which are presented in Chapter 6 as the business requirements. Using the extracted business requirements and the logical sequence of activities, the use cases were developed to better communicate the requirements. Visual representations of the use cases also helped in developing a clear understating between users and requirements de- veloper (researcher) about how the user intends to interact with the system. The initial versions of the use cases were shared with some of the interview participants to get the feedback and the suggested modification were then made.

1.4 Structure of the Thesis

The structure the report is shown in Figure 7, thesis is divided into four parts; motivation, research context and case company, and research methodology is presented in Chapter 1.

Second part consists of a literature review; EPC/EPCM projects are introduced in chapter 2 along with the description of the construction industry supply chain. Chapter 3 presents a detailed discussion on supplier relationship management. Chapter 4 discusses types and categories of requirements, requirements elicitation and development processes. Chapter 5 presents the conceptual framework for the thesis.

Figure 5 Structure of the thesis.

•Chapter 1: Introduction

Introduction

•Chapter 2: EPC Projects

•Chapter 3: Supplier Relationship Management

•Chapter 4: Requirements Engineering

•Chapter 5: Conceptual Framework

Literature review

•Chapter 6: Current State Projects

•Chapter 7: Requirements Elicitation

•Chapter 8: Functional Requirements and Use Cases

•Chapter 9: Requirements Synthesis

Empirical study

•Chapter 10: Discussion and Conclusion

Discussion

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Part 3 consists of the empirical study; Chapter 6 presents an overview on the current state.

In Chapter 7, results of the interview are discussed and system requirements are presented, Chapter 8 illustrates the functional requirements with use cases and in Chapter 9, priori- tization of the requirements is presented along with recommendations for implementa- tions. Finally, the last part, Chapter presents the discussion on the results and conclusion.

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2. ENGINEERING PROCUREMENT AND CON- STRUCTION PROJECTS

In Chapter 2.1 different phases of an EPC project for building a process facility are presented. In Chapter 2.2 the difference between EPC and EPCM contracts is explained, Chapter 2.3 presents different aspects of construction industry supply chain and in Chap- ter 2.4 differentiating characteristics of construction industry supply chain are explained.

2.1 Stages of a Typical EPC Project

An EPC project has several phases; conceptual study, Front end engineering design (FEED), detailed engineering, procurement, construction, commissioning and start-up.

These stages are further described in this section. EPC projects in the process industry are generally longer-term projects and it can take up to five years or more to make a new processing facility. Figure 8 shows the phases in EPC project for building a process facility (Aronen, 2015).

Figure 6 EPC Project Phases for a Processes Industry Facility (Aronen, 2015).

Identifying Opportunity

Before the investment plan for a facility begins, business study is developed. The purpose of this activity is to define business opportunity, cost estimations, and investment plan schedule along with the technical assessments. The result of a business study is the eco- nomic evaluation and functionality requirements for the project. (Baron, 2015)

Conceptual Design

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Every investment plan for a new processing facility starts with the feasibility study, also called conceptual design. Feasibility studies are conducted in the initial phases of the project in order to assess the profitability of the investment project. Feasibility studies are usually conducted through surveys, data gathering, and analyzing the whole environment around the project. This can include legal requirements, Government policies, financial market situation, tax regulations, industry analysis, suitable production processes and equipment, investigation and calculations of process equipment configurations, and operating costs. Preliminary Hazard and Operability study (HAZOP) is also conducted to assess the planned processes and operations in order to identify and examine potential issues that pose risk to personnel, equipment or environment. Feasibility studies evaluate the potential success for the project and provide information on which investment deci- sions can be based.(Nguyen, 2017)

Front End Engineering Design

Once the conceptual study for the project has been completed, project moves forward into the front-end engineering design (FEED), also called the basic engineering sometimes. In this phase of the project, the focus is on defining technical requirements and calculating investment costs for the project. FEED can be split into various packages, which cover different parts of the project. These FEED packages are used to finalize the project technical scope and sufficient cost estimations, this information provides the basis for bidding process and execution phase contracts. Sometimes vendors are requested to provide the budgetary quotation, EFFD contactor may also use existing price lists by the vendors.

Final investment decision is made after Front end engineering design is complete.

(Nguyen, 2017) Engineering

The engineering phase follows FEED, it is also called the execution phase of the project.

At this stage project engineering companies start bidding for the project packages, and vendors prepare first quotations for the engineering companies. Awardee of the project contract carries out the detailed engineering design for the project, procurers all the needed equipment and materials, and then constructs the facility to deliver functioning plant to the owners. Firms that deliver engineering procurement construction projects are usually referred to as the EPC contactors. Sometimes, the same company can deliver FEED and act as the EPC contractor also. For the larger projects, many EPC contactors are involved in different project packages. (Nguyen, 2017)

Procurement

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The procurement organization for an EPC contactor connects the engineering and construction. Procurement includes; the sourcing of materials and equipment within the budgetary requirement, controlling production process after order placement, quality control and inspections, and transportation of goods to the project sites according to the project schedule. The procurement department is responsible for sourcing suppliers, purchasing, expediting, inspecting the manufactured equipment and bulk material, and arranging delivery and logistics support as well. Procurement offices can be located anywhere, this provides more efficient use of procurement resources for the project contractor. (Nguyen, 2017)

Construction

The construction work includes mechanical equipment installations, piping, electric and instrument system installations, underground and aboveground structure framing, installations, painting and all other construction related activities. Any project involves many different contactors and thousands of workers performing work at the construction sites.

Construction sites can be situated in extremely cold regions to deserts, it is the responsibility of the construction organization to insure the site standards and regulations for the labor, health, safety and environment requirements are carefully followed in all the construction activities. (Nguyen, 2017)

Commissioning and Startup

After the construction work has been completed, the commissioning of the plant is performed before going into commercial operations. The purpose of commissioning and start-up is to verify that the facility operates according to the design and project specifi- cations. The success of startup requires planning and participation of all the stakeholders;

engineers, suppliers, construction, owners, and startup team. Deep understanding and analysis skills are you needed for troubleshooting in the commissioning and startup phase.

Completion the delivery of a well-designed and safe facility requires effective commissioning and startup planning. (Nguyen, 2017)

2.2 EPC vs EPCM Contracts

2.2.1 Engineering, Procurement and Construction Projects

EPC projects, sometimes also called “Turnkey” projects, are the contacts where the owner makes a single contact with the EPC contractor to design and build a plant or a facility.

These contacts are usually fixed-priced lump sum contacts, where EPC contactor executes most of the work with relative freedom. The client usually has less say in the design, and

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contractor bears more risk (Plummer, 2007). A typical EPC contract arrangement is shown in Figure 9.

Figure 7 EPC Contract Arrangement (Plummer, 2007)

The EPC contractor makes direct contracts with vendors and subcontractors, and is responsible for all the engineering, procurement, construction, project management, and delivering a commissioned facility to the owner. The EPC contractor may or may not be the FEED contractor. Figure 10 shows the role of EPC contractor and client (owner) in the projects.

Project Components or Subprojects

Phases Civil &

Foundation Plant High-Tech

Equipment Offsite Utilities Client Project

Management Project Management Team (PMT)

FEED FEED Contractor

Project Management EPC Contractor Client

Engineering PMT

High-Tech Proprietary Equipment

Supplier Procurement

Construction or Manufacturing Commissioning

Start-up Client Start-up Team

Figure 8 EPC contract arrangement (Plummer, 2007)

High-tech proprietary equipment is usually procured as packages from the suppliers. EPC contactor sources all the equipment and makes contracts the suppliers of package deliv- eries. Sourcing all the other equipment, materials, and subcontractors, is the responsibility of the EPC contractor as well.

Owner/Client

EPC Contractor

Specilized Process

Engineering Vendors Site Services Trade Contractors

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2.2.2 Engineering Procurement & Construction-Management Projects

Another common contracting strategy is engineering, procurement and construction management (EPCM) contracts, these contacts are more like professional services contracts.

In these type of contracts, EPCM contractor assists the client in bidding, supervising, and administering the construction. The client selects the contactors for different work packages at the advice of EPCM contractor, while retaining control on the construction phase.

EPCM contractor is not liable for any of the work packages by the subcontractors and the client is directly involved with the suppliers (Plummer, 2007). Figure 11 shows the organizational model of a typical EPCM contract.

Figure 9 EPCM Contracting Strategy (Plummer, 2007)

These types of contracts are preferred by the clients when they want a higher degree of involvement in the project, however, they lack the necessary experience and personnel to manage the projects on their own. Client and the EPCM contractor establish integrated management teams for different phases of the project; FEED, Detail Engineering, Pro- curement, Construction or Manufacturing, Commissioning, and Project Management.

(Plummer, 2007) Figure 12 shows the client’s and EPCM contractor’s roles in different phases of the projects for different components.

Project Components or Subprojects

Phases Civil &

Foundation Plant High-Tech

Equipment Offsite Utilities

Owner /Client

Specialised Process

Engineering Vendors Trade Contractors

Sub-contractors Vub-vendors EPC Contractor

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Client Project

Management Client & EPCM Contractor

Integrated Management Team (IMT) FEED

Project Management Engineering

High-Tech Proprietary Equipment

Supplier

Procurement

Construction or

Manufacturing Construction

Contract A Construction Contract B

Commissioning IMT Commissioning Team

Start-up Client Start-up Team

Figure 10 EPCM contract arrangements (Plummer, 2007).

2.3 Construction Industry Supply Chain

Supply chain in the construction industry has various special characteristics and differs significantly from that of manufacturing industry. Construction firms deliver one-off products as projects, this practice makes construction industry unique (Cox, Townsend and Ireland, 2006) and therefore the definition of construction supply chain is different from the manufacturing industry supply chain. According to Muya et at., (1999), there are three kinds construction supply chains:

 The Primary supply chain: this delivers the materials which are utilized in the final construction of the product.

 The Equipment supply chains: this delivers equipment, expertise and the materials for facilitating the construction.

 The Human-Resource supply chain: this is concerned with the supply of labor and human resource.

The supply chain concepts depend on the processes within the industry, the schematic view of the operational activities in the construction industry is presented in Figure 13 (Edum‐ Fotwe, Thorpe and McCaffer, 1999).

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Figure 11 Operational activities in the construction industry (Edum‐ Fotwe, Thorpe and McCaffer, 1999).

The process shown in the above figure is presented as a chain and could be cyclical sometimes, whereby multiple repetitions are performed as the facilities are modernized, up- graded or replaced; or it can terminate in cases where many one-off private developments are done (Edum‐ Fotwe, Thorpe and McCaffer, 1999). Based on the research, Cox and Ireland (2001), have suggested a typical construction supply chain shown in Figure 14.

Figure 12 Construction industry supply chain (Cox and Ireland, 2001).

Effective Demand by Client Conceptual

Construction

Commission/Operate/Maintenance Refurbishment/Replacement

De-commission/Disposal

Equipment Providers Equipment Manufacturers Equipment Supply Chains

Subcontractor Labor Labor Market Labor Supply Chains

Material Suppliers Raw material/ Compo- nent Suppliers Materials Supply Chains

Construction Supply Chains

Construction Form

Professional Services

Firms

End Cus tom er

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As shown in the figure above, the “end customer” represents all the customers of the construction project. Clients usually source the construction projects from construction supply markets in order to get the required functionalities from the project to support the business (Butkovic Lovrencic, Kauric Grilec and Mikulic, 2016). Moreover, the “construction or civil engineering firm”, shown in the picture above, includes all the firms that are responsible for delivering the project to the end customer. These firms operate as integrator for all the constituent supply chains and coordinate the whole chain. “Profes- sional services firms” cover all the engineering, designing, planning services providing firms.

One of the major features of the construction supply chain is that each of the clients sig- nifies a unique customer which has its own unique requirements, and construction supply chain must adapt to those requirements in order to be more efficient and effective (Cox and Ireland, 2001).

2.4 Characteristics of Construction Supply Chains

Although processes in the construction industry differ significantly from that of manufacturing industry, supply chain management practices are still useful and effective in construction industry (O’Brien, 1999). Supply chain management can be a favorable approach to achieve a successful integration of internal and external suppliers, designers, contactors, sub-contractors, and other internal and external clients.

In order to analyze the supply chain management in construction industry, the distinctions between a “construction product” and a “manufactured product” must be specified. Since both of these products are characteristically different, therefore, supply chain management principles cannot be applied the same way in both domains. Some of the critical distinctions between products in the manufacturing industry and in the construction industry are given below (Papadopoulos et al., 2016)

 Products are always delivered as projects.

 The product as the result of each construction project is different.

 Usually, a construction project is intended for a single client.

 The Place, equipment, and methods of production differ in each project.

 There is a high personnel rotation index in construction projects.

 All the parts and materials cannot be stored at the production site.

With regard to the structures and functionality of construction supply chain, Vrijhoef and Koskela (2000) has mentioned the following characteristic elements:

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 It is a converging supply chain, where all the materials and equipment from suppliers are directed to the construction site. The “construction factory” is established around the product where the incoming materials are assembled. In contrast to the manufacturing, where numerous products are produced in the factory and distributed to multiple customers.

 Apart from some exceptions, it is a temporary supply chain which produces one- off construction projects by repeatedly reconfiguring project organizations. As a result, construction industry is characterized by fragmentation, instability, and separation of the design and construction of the product.

 It is made-to-order supply chain, where every project creates a different product.

The process can be quite similar for specific kind of project, however there is little repetition in the products.

All these aspects have to be taken into account when analyzing the supply chain and supplier relationships in the construction industry.

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3. SUPPLIER RELATIONSHIP MANAGEMENT

In Chapter 3.1 definition of supplier relationship management is discussed, different classification models for supplier relationships are discussed in Chapter 3.2. Benefits of SRM are discussed in 3.3 and Chapter 3.4 presents activities involved in the supplier relationship management process.

3.1 Definition

Gartner Consulting (2001) define supplier relationship management as “a set of methodologies and practices needed for interacting with suppliers of products and services of varied criticality to the profitability of the enterprise”. Developing this further Poirier (2006) defines it as “a means of making closer relationships with selected suppliers, with the purpose to discover the added features that could enhance the relationship while improving business performance as the firms work in an environment of mutual benefit and increase the likelihood of creating profitable new revenues together” (Poirier, 2006 p. 3).

Fogg (2009) has focused on the interactive aspects of the relationship between the supplier and buyer and on the benefits of improved performance to both parties as well. Ac- cording to him, SRM is “the process of managing the interaction between two entities - one of which is supplying goods, works, or services to the other entity”. He has further described SRM as "a two-way process in that, it should improve the performance of the buying organization as well as the supplying organizations and hence be mutually beneficial” (Fogg, 2009). It also supports Brimiacombe et al.’s view (2011) that SRM can

“optimize value through cost reduction, innovation, risk mitigation and growth through- out the relationship life cycle”.

Management consulting firms also contributed in developing the SRM terminology.

PricewaterhouseCoopers (2013) has emphasized the value of the two-way relationship between buyers and suppliers. However, PwC has emphasized on the relationships with key suppliers, the mutual benefits that both parties can achieve, as well as the characteristics of these relationships. PwC simply defines SRM as “a systematic approach for developing and managing partnerships, focused on joint growth and value creation with a limited number of key suppliers based on trust, open communication, empathy and a win- win orientation”(PricewaterhouseCoopers, 2013).

SRM can contribute to a company’s competitive advantage when it is taken into consideration across the organization (O’Brien, 2014). Schuh et al. (2014) took a similar and more holistic approach to SRM, he has introduced the term “true SRM”, here SRM is

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supposed to “drive supplier’s behavior, encompass the relationship between two enter- prises and enable a company to leverage its size by coordinating across divisions, functions, and hierarchies” (Schuh et al., 2014).

It can be seen that various definitions are present in the academic literature for the term supplier relationship management; nonetheless, most of the definitions posit “developing and managing relationships and interaction between suppliers and buyers” as an important point of supplier relationship management. Moreover, all of these illustrate that good supplier relationship management will create a win-win relationship and help create value for both parties.

3.2 Benefits of SRM

The goals of SRM and the benefits it can bring to an organization are discussed a lot in the academic research; this section is meant to examine some of the benefits in more detail.

Many of the research studies have shown a strong relationship of a successful SRM to the financial performance of a company (Carr and Pearson, 1999; Johnston et al., 2004). In a study presented by Schuh et al., (2014), SRM is said to have affected supplier performance, risk management, supplier segmentation, improving communication across functions, and hierarchical levels. Moreover, a strong relationship with the supplier can enhance its performance like; lower lead time (Larson and Kulchitsky, 2000), higher re- sponsiveness and loyalty to the buyer (Martin and Grbac, 2003).

Another benefit of SRM was pointed out in the research by Gartner Consulting (2001), SRM can optimize relationships with the suppliers because each supplier is treated dif- ferently based on the value provided. Most significantly, supplier relationship management starts the development stretching beyond the contractual agreements and maximizes the value across supply chain (Schuh et al., 2014). Schuh et al. also state that SRM can enable a company to utilize its supplier base to gain a competitive advantage. In wider perspective, the aim of SRM is to work together with the supplier base to create an eco- system that contributes towards a company’s competitive advantage. Moreover, going beyond the cost optimization to pursue a strategy of growth and innovation (Johnston et al., 2004; Schuh et al., 2014). Research by Gartner Consulting, (2001) also supports these views, it adds that SRM can speed up the introduction of innovative solutions to the market by working together with the suppliers. It can reduce the cost of supply chain and operations and derive the profits while still ensuring the quality.

In addition, PwC (2013) emphasizes the importance of joint development and invest- ments in SRM because of the common goals, combined efforts, and resource commit- ments, thereby creating a culture of continuous advancement. According to them, it en-

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courages supplier’s behavior and capabilities since suppliers stand to benefit through involvement in early stages of development. Because of that, both buyer and supplier have a joint commitment and enjoy equal success (Lambert and Schwieterman, 2012). There- fore, these advantages make the buyer a preferred customer with better access to supplier’s resources. Eventually, SRM strengthens the buyer supplier relationship and in- creases the prospects for future cooperation (Duffy and Fearne, 2004) and improves performance of the supply chain (Benton and Maloni, 2005; Narasimhan and Nair, 2005). It is quite evident from the presented discussion that SRM can play an important role for a company by reducing costs, driving profits, and by establishing good relationships with suppliers.

3.3 Classification of Supplier Relationships

Academic literature describes different types of supplier-buyer relationships, even though by all supplier relationship is quite important; however, all the relationships are not equal (Trent, 2005). Various frameworks have been developed to categorize the supplier relationships based on the value they add to the buying organization. Some of these models are described here in detail. Trent (2005) presented the four C’s of buyer-supplier relationships as shown in Figure 15. According to him, buyer supplier relationship can be categorized into four classes: counter-productive (lose-lose), competitive (win-lose), co- operative (win-win), and collaborative (win-win) (Trent, 2005). The following descrip- tion is based on the studies of Trent (2005) and Zamboni (2011).

Figure 13 Classification of supplier relationship Trent (2005) and Zamboni (2011)

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Counter-productive relationships are the outcome of both parties working against each other, resulting in no profit for either. This competitive relationship is an adversarial relationship, where members work towards their own objectives to gain a bigger share of the value. The cooperative relationships are formed when suppliers are a part of the long- term strategy of the company for the supply-base. These relationships are bound to long- term agreements and characterized by the combined efforts for reducing costs, improving quality and other issues related to developing a more efficient supply chain. Finally, the collaborative relationships are usually established with only some specific suppliers, who supply goods or services of critical nature. Buyers and suppliers work jointly on development activities in this type of relationship. Collaborative relationships are also termed

“strategic alliance” by some researchers (Leenders et al., 2006).

Cox (2004) has presented a model to categorize supplier-buyer relationships in a two- dimensional area of interaction. Figure 16 shows Cox’s model.

Figure 14 Supplier classification Cox (2004)

According to the model presented by Cox and Ireland (2002), one aspect is the “way of working”; it is the operational interaction between organizations. The other aspect is the

“relative share of value appropriation”, meaning how partners try to maximize their relative share of the value. Only a limited amount of information exchange takes place when companies keep each other at arm’s length. Their research also indicates that more collaborative interaction takes place when both parties are invested in developing a long- term relationship and share the business goals and values. Ha et al.’s (2011) work shows that if partners try to maximize their own share and disregard the other party, this results in an adversarial values-appropriation. In contrast, when each party tries to develop a win- win relationship by sharing the value with the other, it is called non-adversarial value- appropriation (Ha, Park and Cho, 2011).

From these two characteristics, four distinct styles for supplier relationship management have arisen (Cox, 2004). These relationship styles are quite similar to the ones presented

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by (Trent and Monczka, 2003). In line with his model; four styles described by Cox (2004) are given in Table 2:

Table 2 Types of supplier relationship Cox (2004)

Peter Kraljic (1983) developed a traditional framework which is depicted in Figure 17 , Kraljic’s model is more focused on the potential profit impact and possible supply risks from the suppliers, rather than the value generated for buyers and suppliers from the relationship (Gelderman and Semeijn, 2006).

Figure 15 Peter Kraljic’s (1983) portfolio matrix.

In Kraljic’s portfolio matrix, products are categorized by high-low supply risk and high- low profit impact. This results in four different product categories: Strategic, Bottleneck, Leverage, and Non-critical items. Suppliers providing these four categories of items can

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be assigned to these groups (Nellore and Soderquist, 2000). Strategic and bottleneck suppliers, from these four categories, demand the most attention from companies. Whereas, suppliers of non-critical or leverage items can be managed with lessor efforts (Gelderman and Van Weele, 2003). It is noticeable that strategic relationship is similar to the collaborative relationship presented by Trent (2003), strategic alliances in Leender’s study (2006) and non-adversarial collaborations of Cox’s model. Although, the rest of management styles are not congruent to the categories of other described models, Kraljic’s model provides a different aspect by considering the nature of the product for classification of relationships.

From the discussion of these models, it can be drawn that for buyer’s relationship with suppliers differ in nature. These models inform organizations how to classify the suppliers based on the strategic value of their products or services to choose the most suitable relationship type and managerial approach.

3.4 Supplier Relationship Management Processes

Supplier relationship management is already a complex concept to understand, and it is even more difficult to for companies to decide how they can manage relationships with their suppler base (Cox, 2004) the best way. Nevertheless, (Trent, 2005) suggests that there are some SRM practices that organizations can focus on. The following part describes in detail supplier relationship management activities. These include:

Supplier Selection

Some academics consider suppliers selection a part of supplier relationship management (Liker and Choi, 2004; Park et al., 2010) and it is crucial for an efficient manufacturing operation and supply chain. Buyers usually have a number of suppliers available to them, the most important thing here is to select a supplier that offers the best value, cost, and functionality mixture (Cox, 2004).

Suppliers are assessed against set criterion before selection or rejection. This process is critical, as it provides the bases for the entire supplier management process latter on.

There are certain difficulties buyers must address: single sourcing and multiple sourcing.

In single sourcing, all the sourcing requirements of the organization are to be met by a single supplier, this demands the sourcing manager to be very careful in selecting the most suitable one. When sourcing requirements cannot be met by only one supplier, managers need to choose several suppliers and carefully distribute the supplies among them (Park et al., 2010).

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Organizations need to consider multiple factors in the supplier selection process (Handfield, Monczka and Giunipero, 2011). Leenders et al., (2006) states that financial health, location, technological capability, and quality system are important factors. The relative size advantage that buyer enjoys over a supplier is also a key factor, because it affects the bargaining power of the buyer. Therefore, based on the size and business needs, buyer can decide it would have a size advantage or not. Buyer enjoys a stronger position in the negotiation if it represents a bigger portion of supplier’s business.

(Handfield, Monczka and Giunipero, 2011)

Lysons (2000) has also indicated some other important issues that should be considered in the selection suppliers such as local or global suppliers, competitors as suppliers, and low-cost sourcing. Therefore, companies must establish some clear criteria taking into consideration business needs and position when choosing suppliers.

Supplier Evaluation

Supplier evaluation is important in managing suppliers-buyer relationships. Supplier evaluation is done at two stages; suppliers’ selection, and supplier development. In supplier selection phase, supplier evaluation is carried out to prioritize the potential suppliers in order to select the most suitable one. In the supplier development process, supplier evaluation is used to control and evaluate the suppliers-buyer relationship (Osiro, Lima and Carpinetti, 2014).

Supplier evaluation in the supplier relationship management is “the process of quantify- ing the efficiency and effectiveness of supplier actions” (Neely et al., 1997). Supplier evaluation process assists the decision-making process of the buying company, through this, buying organization can implement changes or encourage improvements in supplier’s behavior (Neely et al., 1997). Moreover, it is also a way to affect supplier’s actions (Schmitz and Platts, 2003).

Evaluation is not strictly defined in the academic literature and can refer to various activities in the process. Hald and Ellegaard (2011) describe evaluation in a three-phase model, which is primarily related to supplier’s performance evaluation. According to them, supplier evaluation is the process of evaluating supplier’s performance and the performance measurement guides further action. Some authors think of evaluation as the segmentation and classification of suppliers against a set criterion (Olsen and Ellram, 1997; Araz and Ozkarahan, 2007). Thus, in addition to the performance evaluation, supplier segmentation should also be taken into consideration in the evaluation process.

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Supplier Segmentation

As explained in the previous section, some authors consider supplier segmentation as part of the supplier evaluation process (Olsen and Ellram, 1997; Araz and Ozkarahan, 2007).

Nonetheless, this section explains the supplier segmentation separately to explain the objectives and activities in more detail.

Svensson (2004) consider supplier segmentation an important activity for company’s business, as it can support company’s efforts to improve and sustain the market position among other strategic objectives. Segmenting the supply base guides the direction of buyer-supplier relationships (Day, Magnan and Moeller, 2010). According to them, through supplier segmentation, companies are more able to evaluate suppliers by taking into account the past collaborations, potential abilities of the value generation, and pro- spective future partnerships. Therefore, supplier segmentation can be vital in linking firm’s capabilities to draw best value from the supplier base (Day, Magnan and Moeller, 2010).

Kraljic’s model, as explained earlier, is considered a major breakthrough in purchasing history to rank suppliers (Svensson, 2004). In his model, suppliers are classified based on supply risk and profit impact. There are many other models developed after Kraljic’s model such as; in the study of Olser and Ellarm (1997) and Araz and Ozkarankan (2007).

Suppliers are classified based on two aspects in most of these models. In the framework presented by Olser and Ellarm (1997) suppliers are placed in different groups based on the performance and strength of that relationship. PwC (2013) has categorized suppliers according to “competitive advantage and business fit” versus “performance at risk”, in this framework suppliers are classified as preferred, transactional, strategic or development suppliers.

In a different approach, Lamming (1994) mentioned multiple tiers of suppliers namely;

first, second, and third tier suppliers. This distinction represents the degree of influence a supplier can have on the supply chain. Suppliers with an integrated system for supplying directly to buyers or those who could significantly impact the buyer if they supplied in- directly are considered first tier suppliers. The second-tier suppliers deliver support services or generate inputs to the first-tier suppliers (Lamming and Rand, 1994)

Due to the presence of many models for segmentation, PricewaterhouseCoopers (2013) suggests there organizations should take into consideration the most important aspect for them such as; corporate strategy, industry specific requirements, business processes among others, for the supplier segmentation process.

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Relationship Development

Relationship development differs from supplier development; it is a reciprocal interaction between parties and is focused on the relationship instead of the delivery of products or services (Fogg, 2009). While, the supplier development process is more on the tactical level and is primarily focused on solving problems, relationship development starts from an already good existing relationship between parties. Fogg defines relationship development as “a two-way process between buyers and sellers where activities jointly under- taken bring the organization and the people working within them progressively closer towards a more trusting and mutually beneficial state”. (Fogg, 2009)

The (Ford, 1980) has emphasized a great deal on the human element of organization, in order to better tackle the relationship management. Human investment from the beginning of the relationship is quite beneficial to relationship development (Paulraj, Lado and Chen, 2008). Firms should encourage the suppliers to give their ideas in the development process (Trent, 2005) and there should be effective inter-organizational communication.

Buyer’s personnel should also understand supplier’s employees, what their aspirations are and where they would like to lead the organization to (Fogg, 2009). Furthermore, according to Liker and Choi (2004) and Fogg (2009), to have a more frequent updates and information, exchange regular meetings between people from both organizations should be held. This will also help engage people from organizations with each other.

Moreover, Mentzer Jr, Myers and Stank (2007) and Ford (1980) point out that a long- term commitment and trust is required in order to foster a good relationship between suppliers and buyers.

Performance Measurement

Performance measurement is a standard way to review and control supplier performance in a systematic manner (Handfield, Monczka and Giunipero, 2011). It provides information for the organization that is useful in planning and managing different activities in the organization (Cousins, Lawson and Squire, 2008). According to (Handfield, Monczka and Giunipero, 2011) performance measurement evaluates qualitative factors such as delivery issues, quality standards, and cost comparison. Various authors have suggested different ways to measure supplier performance such as; the balanced score- card by Kaplan and Norton (1996) or the performance pyramid by Cross and Lynch (1992).

One purpose of measuring supplier performance is to inform the decision-making process (Olsen and Ellram 1997), and encourage supplier behavior better suited to company’s

Defining supplier relationship management system requirements for an EPC firm: a case study

HUSNAIN SIKANDER